On August 25, 2015, the participating provinces and territory in the Cooperative Capital Markets Regulatory System achieved an important milestone towards implementation of the system by publishing a revised consultation draft of the uniform provincial and territorial capital markets act (now known as the Capital Markets Act), along with the drafts of the initial regulations proposed for adoption by the participating provinces and territory under the draft uniform act. These materials have been published for a 120-day public comment period.
This article is part of Gowlings' Guide to the Proposed Initial Regulations and related materials. In this segment of our guide, we discuss the proposed initial regulations relating to the distribution of restricted shares. To view other sections of the guide, click here.
The participating provinces and territories are proposing to impose a majority of the minority shareholder approval requirement for prospectus exempt distributions of restricted shares (which are “equity shares” that are not common shares or equity shares determined by the new chief regulator to be restricted shares). This is set out in section 8 of CMRA Regulation 41-501Prospectus Requirement and Exemptions and is based on Part 3 of OSC Rule 56-501Restricted Shares. The adoption of the majority of the minority shareholder approval requirement will represent a change in British Columbia.
Section 8 of CMRA Regulation 41-501 provides that the prospectus exemptions under capital markets law are not available for a “stock distribution” of restricted shares of a reporting issuer, or an issuer if the issuer will become a reporting issuer as a result of the stock distribution, unless:
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For the definitions of “equity shares”, “stock distribution”, “minority approval” and “reorganization”, see note (1) below.
The information circular prepared in connection with the shareholders’ meeting held to obtain minority approval for the stock distribution or reorganization must contain prescribed information (including, for example, the name of each control person of the issuer and the number of securities beneficially owned by the control person).
An exemption from the majority of the minority shareholder approval requirement in section 8 of CMRA Regulation 41-501 is available for a stock distribution that is (i) of securities of an issuer that was a private company immediately before the completion of the stock distribution, or (ii) a subsequent distribution by such an issuer of securities of the same class as offered under the initial stock distribution.
Rationale behind Part 3 of OSC Rule 56-501
Dual class share structures, which exist where a company issues a class of shares carrying a disproportionate vote per share relative to other classes of shares, have been a popular financing device in Canada. The issuance of these shares, including restricted shares, allows the financing needs of an issuer to be met without the controlling shareholder having to subscribe for such shares to avoid dilution in its voting control. The Ontario Securities Commission adopted OSC Rule 56-501 as a result of its past experience with dual class share structures.
Despite the protections already afforded for minority shareholder interests under Canadian corporate law (such as shareholder oppression remedies), the majority of the minority shareholder approval requirement in section 8 of CMRA Regulation 41-501 is intended to heighten regulation in the area of restricted shares and provide further investor protection.
How does section 8 of CMRA Regulation 41-501 differ from OSC Rule 56-501?
Section 8 of CMRA Regulation 41-501 adopts Part 3 of OSC Rule 56-501, largely, in its current form as of March 2, 2015. There are no noteworthy changes that have been proposed against Part 3 (or against section 4.1 of OSC Rule 56-501, which is also being adopted to allow the new chief regulator to make determinations that equity shares are restricted shares).
However, in view of the disclosure obligations imposed on issuers with restricted shares under Part 10 of National Instrument 51-102 Continuous Disclosure Obligations, the participating provinces and territories have not proposed to carry forward the mandatory disclosure requirements related to restricted shares currently imposed under Part 2 of OSC Rule 56-501. This includes an obligation to provide disclosure about the restricted nature of the offered securities in a rights offering circular or offering memorandum for a stock distribution.